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Competitive Challenges: Detroit’s Shifting Fortunes

The speed of change in the auto industry is accelerating, with Detroit feeling the heat.

The speed of change in the auto industry is accelerating, with Detroit feeling the heat. But Detroit’s current crisis began years ago as Japanese, Korean and European automakers entered the hot market segments formerly dominated by the domestics with well-designed, high-quality products. The trend continues unabated. For example, Toyota just launched a new lineup of full-sized pickups that finally offer an expanded range of powertrain combinations and body styles that for decades have been exclusive hallmarks of the pickup truck lineups at GM, Ford and Chrysler. Financial results recorded by the Detroit firms versus those of their three largest Japanese rivals provide the most visible examples of today’s competitive gap. On a pre-tax basis in 2005, GM lost $1,271 per vehicle in North America. Ford lost $451 and Chrysler Group earned a razor-thin $144. Nissan’s North American operations generated $2,135 per vehicle, compared to $1,715 for Toyota and $1,259 for Honda. In the first nine months of 2006 those profit numbers for some companies have changed dramatically. For GM the trend is a positive one. They have trimmed their loss to approximately $333 per vehicle in North America, which is a 74% improvement over the same time period in 2005. Ford, on the other hand, has a negative trend, a loss of approximately $1,354 per vehicle in North America or down 143% from the same period in 2005. Even more dramatic is the complete reversal of Chrysler Group’s good fortune. Chrysler has lost approximately $1,144 per vehicle in the first nine months of 2006, nearly 678% worse than 2005. The Japanese, through the first six months of their fiscal year 2006/2007, continue to have strong profitability with Honda and Toyota earning over $1,400 per vehicle and Nissan (down to) approximately $1,900.

Disparities of this magnitude are obviously unsustainable for GM, Ford and Chrysler. We do not wish to minimize the progress that Detroit has made in many areas of their operations. GM, in fact, has stunned the automotive world with its 2006 progress and in particular the improvement in revenue per vehicle. GM’s first-half 2006 revenue in North America jumped 23% despite an 11% reduction in unit sales. This revenue surge came from its value pricing initiatives, reduced vehicle sales incentives, and a richer mix of vehicle sales, including its redesigned full-sized SUVs. This significant change in performance indicates that GM’s turnaround plan is taking hold, and all indications point to continued progress. Chrysler Group was showing strong benefits from the once-controversial merger with Daimler-Benz and is beneficially sharing design and engineering knowledge with its European partner. However, in 2006 Chrysler Group pursued a policy of not taking production downtime to balance inventories to avoid paying workers for not working. The company consistently overproduced vehicles—by the thousands—that currently are stored in parking lots because no dealer ordered them. DaimlerChrysler officials conceded that their sales expectations for 2006 had been overly optimistic. Even with cuts in production it seems that the road ahead will be difficult for Chrysler. From August through November 2006 the changes at Ford were substantial, from production cuts to naming Alan Mulally as the new CEO. Additionally, the company has accelerated its “Way Forward Plan,” key executives have left the company, and Ford has put up assets as collateral for huge loans to fund restructuring. These changes indicate how dire the situation is for Ford and how quickly it must move to regain operating stability.

After years of low-grade profitability, time is running out for the Detroit firms. They must act immediately and forcefully to overcome internal barriers to sustained profitability. The key to success will be in the speed to execution. It now appears that Toyota can easily fund its ambitious worldwide expansion program and its drive to become the world’s dominant automaker. Honda also is well positioned for strong performance and growth in North America. Nissan’s recent financial performance has been strong, but there have been some signals of challenging times ahead. Nissan’s market share growth and certain products are not as strong as top competitors. It’s commonly thought that the Japanese automakers’ superior profit performance is due to advantages in quality and manufacturing efficiency. We have recently studied these differences and have found that factors such as body architecture, product engineering, component commonality, labor issues and the supplier impact are major factors to consider in assessing the competitive gap and we will explore these factors over the next few months. 

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